Short end yields anchored; NZ and German 10yr yields up; UST 10yr trades sideways; NZ swap curve expected to steepen further next year

By Kymberly Martin

In a reversal of the previous day’s moves, NZ long-end yields pushed 3-4bps higher yesterday. Short-end yields showed less movement. Overnight, US 10-year yields traded a tight sideways range, though German equivalents traded a little higher.

Once again the short-end of the NZ curve remained fairly well anchored, closing up just 1bps, at 2.28%. We continue to see resistance to NZ 2-year swap breaking above 2.35% near-term. Technically, this marks the highs of its range since March this year. Fundamentally, that level would be consistent with the market pricing OCR hikes from early in H2 next year. We believe that is probably premature.

We anticipate the RBNZ will begin hiking in H1 2018. By that time we anticipate that NZ CPI inflation will be showing signs of nudging above the RBNZ’s 2% mid-target. As inflation has undershot expectations for such a long time now, we expect the Bank will be happy to see this evidence of inflation, rather than being pre-emptive with rate hikes.

NZ 10-year swap closed up 4bps, at 3.38%, taking the 2-10s curve to 110bps. In the early part of next year we anticipate further steepening to 125bps. However, in the meantime we would not be surprised to see the curve consolidate around the current level, assisted by some consolidation in US long yields.

Overnight, US 10-year yields traded a tight range between 2.37% and 2.40%. A pullback in the global oil price likely assisted the loss of upward momentum. However, German equivalents pushed a bit higher, from 0.32% to 0.37%. This take US-German 10-year spreads back to 202bps from late-November highs near 12bps. We continue to view this spread as a constraining factor on the rise in US long yields.

Yesterday the RBA left its cash rate unchanged at 1.5%, as expected. There were few changes of substance to its statement. The Bank appears neutral at this point, with no clear bias. More interesting however was the release of AU Government spending and net export figures. These both provide downside risk to today’s AU Q3 GDP numbers. Our NAB colleagues continue to look for -0.2% (consensus -0.1%), but now see downside risk to this. If delivered, this could see the market re-price chances of further RBA rate cuts.

This morning, RBNZ’s Wheeler will appear before the Select Committee. Although he will be discussing the Bank’s annual report, there is potential for market relevant discussions.

Kymberly Martin is on the BNZ Research team. All its research is available here.